Health Plans Cannot Ignore Express Scripts-Medco Deal

The resulting company could control 40 percent of the PBM market, but would any savings be passed on to insurers?

August 1, 2011

Frank Diamond

Managing Editor

If Express Scripts and Medco Health Solutions ever actually consummate their planned $29 billion merger, what will that mean for health plans and other payers?

There are some real concerns about the merger, after all. “My first reaction was like everybody else’s,” says Sadhna Paralkar, MD, a health management consultant at Segal. “That this will reduce competition and will ultimately raise health care costs for the clients, because that’s what usually happens when the competition goes down.”

Expect the two pharmacy benefit managers to testify to the Federal Trade Commission (which has to rule on the match, considering antitrust concerns) that because the resulting company would have more bargaining power with drug companies, it could force lower prices.

But as Paralkar’s colleague, Edward A. Kaplan (a Segal Co. benefit consultant) tells the New York Times, “The question is, Will they pass it on to the buyer or will they keep it for earnings?”

Paralkar says that the more she thought about it, the more she felt that such a merger might “give some other smaller and not-so-well-known PBM carriers some much needed momentum. Something like UnitedHealth’s PBM, which is Optum RX, could become a commercializable entity where it could serve other customers.”

Expect the approval process to be grueling, she says. “The bigger the carrier gets or the vendor gets, the less people tend to trust it because of its power, and they are suspicious of its willingness to work on your behalf as a client,” says Paralkar.

In a discussion with Wall Street analysts on July 27, Aetna CEO Mark Bertolini was asked about the Express Scripts-Medco merger, and he indicated that he did not view it as a threat. He alluded to the deal struck last year between Aetna and CVS Caremark in which the PBM will oversee the insurer’s prescription drug program for 12 years.

“We believe that the deal we did with CVS … gives us as good a position as any other deal in the marketplace and any independent PBM in the marketplace.... We believe the Express Scripts-Medco merger presents a potential for some opportunities should there be fallout as part of the integration.”

Still, as the Times reports, “Consumer groups have already raised concerns with the commission over whether CVS Caremark, the result of a merger between a large drugstore chain and a pharmacy benefit manager, is hurting competition, and regulators are likely to want to prevent the [Express Scripts-Medco] merger if they have similar worries that it will stifle competition.”

If the merger is approved, the new company could corner about 40 percent of the market, Adam J. Fein, an industry consultant, tells the newspaper. CVS Caremark controls about 16 percent of the market, he says.

Different strengths

The Times notes that in some ways the benefits of the merger are obvious to the companies involved. “Express Scripts has specialized in understanding patients’ behavior and why they may not take their medicines, while Medco has emphasized clinical expertise to determine which medicines work best.”

Analysts told the newspaper that the deal “could fundamentally change the dynamics of the market for overseeing prescription drug use for health plans and employers...”

“I have a feeling that it is not going to be as bad as people anticipate,” says Sadhna Paralkar, MD, a Segal consultant.